Bright Simons writes: Is Menzgold a financial innovator?

When the Menzgold issues started to garner public traction, not many people thought it was interesting enough to spend any time analysing them. A few of us, on the other hand, found the whole affair mesmerising.

In our various comments on the subject, we warned against two extremes:

Overbearing regulations and omnipotent regulators whose arbitrary, mission-creeping, and cookie-cutter approach to their work can stifle innovation and prevent genuinely mould-breaking innovations and innovators from entering our financial markets;

Weak regulation that fails to engage with emerging trends in the financial markets, favour strong competition, or promote fair and transparent standards; and the absence of a consumer protection regime premised on open and consistent communications, clear guidance and risk-based supervision.

The first warning had the Bank of Ghana (BOG) in mind. The second was implied criticism directed at the Security & Exchanges Communication (SEC).

BOG was at the time of our initial commentary fast transforming itself into an octopus-omnibus regulator and encroaching the territory of other regulators; whilst SEC seemed, to all intents and purposes, comatose.

Since then, a whole lot has happened on various fronts, but the tension brought about by the continued framing of the Menzgold affair in certain circles, even in some sophisticated ones, as a tension between “financial innovation”, on one hand, and “firm regulation”, on the other, continues to block effective analysis. One Academic, an economist, was recently heard on primetime television applying the precautionary principle of harm: if people are benefiting from Menzgold, then what value would regulation bring, he asked.

In many ways, that is the issue at stake: innovations bring benefits to many people, and unless regulation can show that risks or harm to other people are possible, or even imminent, in the absence of control, many liberal-minded people are unlikely to accept that regulation must by all means be imposed. This country does not exist to provide regulators with “something to do”. Regulators, like all other professionals, must continually convince us that their resources and powers, all granted by public endowment, actually do improve our society and ultimately enrich our lives by securing our interests.

Menzgold insists that they are financial innovators here to rescue us from a moribund financial system that is shortchanging consumers by providing returns below inflation, and that their presence implies much needed competition to mutual funds, unit trusts, and other investment platforms in the country, who have had it too easy for far too long.

The regulatory agencies insist that, even so, Menzgold needs to comply with the relevant laws so that their operations can be better monitored to confirm that they are indeed doing what they claim is in conformity with the law.

Unless it can be shown that the activities of Menzgold are genuinely so revolutionary that our laws as they exist today did not foresee them and therefore could not have determined that they have characteristics that warrant additional regulation beyond that which all businesses must comply with (eg. business registration and tax), Menzgold would need to undergo immediate licensing. The demand for a “special” dispensation to accommodate them would be shown to be empty.

Licensing would ensure that they file regular reports to the authorities and submit themselves to intrusive scrutiny including the verification of claims made in the reports. A major feature of such prudential regulation would be to establish that the company is technically solvent, and that it is observing the standard rules of accounting practice.

Sections 24 to 31 of the primary legislation on securities in Ghana (Act 929) grant wide powers to the SEC over all businesses in Ghana dealing in securities, in whatever form. This extends to authority to cause the production of accounting records and other “books” of the company under scrutiny for examination. Indeed, the SEC’s powers here may even extend to non-licensees (under subsection 24(1)g and elsewhere).

The usual argument one hears in this connection is that Menzgold has not been known to default on its obligations, so what is the problem of the regulators? Well, by that logic, any driver that has never had an accident shouldn’t worry about licensing. Licensing of drivers exist because we consider driving to be risky and potentially harmful enough that a particular type of review of drivers’ skills and vehicular conditions has been established by law. This is without respect to any particular driver’s track record.

The rational question to ask therefore is whether the activities Menzgold are engaged in currently bear similar risks to those being engaged in by insurers, brokers, banks, discount houses, money transfer companies, etc. If so, then the next question to ask is whether, beyond the similarity of risks, the activity is sufficiently similar or perfectly identical to any of the explicitly identified lines of businesses regulated by mandated agencies under the law. If the answer is yes, then the analysis moves on to determine the appropriate manner of bringing Menzgold into compliance with the appropriate licensing regime.

The simplest way to make that determination is to simply examine the “product” and/or “services” that Menzgold is selling. The most definitive description of that product/service is to be found in the legally binding contracts that cover or governs the sale. They describe, more than anything else, what is officially on offer.

We have done just that, and our findings are as below.

In each of the trading contracts Menzgold enters with counterparties, it identifies itself as a “Gold Trading Platform” and the counterparty as a “trader”. Menzgold starts by projecting itself as offering an over-the-counter channel to certain trading exchanges. The “trader” utilises Menzgold’s proprietary platform to “trade” in gold in these unnamed gold exchanges or markets.

Menzgold asserts as follows: “the company, under full corporate authority and responsibility, declares that he (sic) has the clear and qualified right to deal in gold (AU metals)”.

In the same clause 1, the “trader” (i.e. the individual or institution entering into the contract with Menzgold) affirms that (on the pain of “perjury”, no less) they did not get the gold from a criminal source.

The trader is then provided with specifications that the gold must meet:

The gold must be Aurum Utallum;

It must be 22+ carats;

It must be in the form of Gold Dore bars;

Source: Bright Simons

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